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Categories of Alternative Investment Funds (AIF) in India Explained
- Ripradaman R
- 1 day ago
- 3 min read
Introduction
Alternative Investment Funds (AIFs) are privately pooled investment vehicles regulated by SEBI in India.
They cater primarily to high-net-worth investors and institutions.
SEBI classifies AIFs into three categories based on investment strategy and risk profile.
Category I AIF – Early-Stage and Social Impact Investments
Category I AIFs invest in sectors that are considered socially or economically desirable.
Key Characteristics
Focus on startups, infrastructure, and SMEs
High risk with long-term capital appreciation potential
Government may offer incentives in some cases
Sub-Types of Category I AIF
Venture Capital Funds
Angel Funds
Social Venture Funds
Infrastructure Funds
SME Funds
Category II AIF – Private Equity and Debt Funds
Category II AIFs are the most widely used category in India.
Key Characteristics
Invest in private equity, structured debt, or unlisted companies
No leverage allowed except for short-term operational needs
Moderate to high risk
Popular among institutional investors and HNIs
Sub-Types of Category II AIF
Private Equity Funds
Debt Funds
Fund of Funds
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Category III AIF – Hedge Fund Style Strategies
Category III AIFs use complex trading strategies and leverage to generate returns.
Key Characteristics
Use derivatives, leverage, and short-selling
High risk and high volatility
Short-term trading strategies
Suitable for sophisticated investors only
Sub-Types of Category III AIF
Hedge Funds
Long-Short Equity Funds
Quantitative Trading Funds
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Minimum Investment Requirement for AIFs in India
SEBI mandates high minimum investment limits to ensure only sophisticated investors participate.
Current Minimum Limits
₹1 Crore per investor
₹25 lakh for AIF employees or directors
₹25 lakh minimum for Angel Funds
AIF vs Mutual Funds: Key Differences
Structural Differences
AIFs are privately pooled investment vehicles
Mutual funds are publicly offered and retail-friendly
Risk and Liquidity
AIFs have limited liquidity and long lock-ins
Mutual funds offer daily liquidity
Investment Size
AIFs require large capital commitments
Mutual funds allow small retail investments
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Who Should Invest in AIFs
AIFs are suitable for:
High Net Worth Individuals (HNIs)
Ultra HNIs and family offices
Institutional investors
Investors seeking alternative asset exposure
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Conclusion
AIFs in India are structured into three categories based on strategy and risk.
Category I focuses on early-stage and impact investments, Category II on private equity and debt, and Category III on hedge-style trading strategies.
They offer diversification and high-return potential but require high capital and risk tolerance.
FAQ
1. What is an AIF in India?
An AIF is a privately pooled investment fund regulated by SEBI that invests in non-traditional asset classes.
2. What are the three categories of AIF?
Category I (VC and impact), Category II (private equity and debt), Category III (hedge fund strategies).
3. Which AIF category is the safest?
Category II is generally considered relatively lower risk compared to Category I and III.
4. What is the minimum investment in AIFs?
₹1 Crore per investor, except for Angel Funds and employees/directors.
5. Are AIFs better than mutual funds?
AIFs offer higher return potential but carry higher risk and lower liquidity than mutual funds.
Citations
SEBI Alternative Investment Fund Regulations
Reserve Bank of India Investment Guidelines
NSE and BSE Market Reports
Industry reports from PwC and EY
Association of Mutual Funds in India (AMFI) research publications
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